Why this PE fund is ditching tech investing for SMBs

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“We bought in at multiples of EBITDA, rather than multiples of revenue, and that gave us a better risk-adjusted return. And, there are more businesses to choose from.”

PieLab’s first $28.5 million fund real estate technology focused fund kicked off in 2016, after Mr Rolls sold Queensland’s largest property management business Rental Express to billionaire Paul Little’s Little Real Estate in December 2015.

The PE fund has already secured commitments from 39 out of its 43 original investors to re-invest the same amount, or more, in fund two.

To date, PieLab has invested in 10 companies, including real estate email marketing tech platform ActivePipe, rental tech company HappyCo, Amazon Web Services-centred tech transformation company Idea 11, Brisbane-based artificial intelligence-powered lead generation start-up AiRE and tech-enabled research business Farron Research.

From its first fund it also invested in a few non-tech companies including safety and compliance company Detector Inspector and Queensland-based strata management and body corporate services business Stansure Strata.

The fund has an internal rate of return of 34 per cent net of fees and, it has had two exits, which collectively returned half the capital from fund one in cash.

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In February, ActivePipe was sold to Seattle-based tech company MoxiWorks for an undisclosed sum.

Mr Rolls said he was expecting about half of the new fund to be taken up by existing investors.

“It’s particularly family offices that are increasing their allocation, in some cases asking for a 10x increase on the amount in fund one,” he said.

“Family offices realise that we’re not investment bankers, we’re operators of businesses, and we know how to operate a good quality small and medium-sized business.

“My view is the prices you’d need to pay to invest in growth tech businesses are more attractive than they were six months ago, but nowhere near as attractive as they were when we first started investing. The valuations are still too high and the risk-adjusted returns for SMBs are far superior.”

In most cases, the companies PieLAB intends to acquire for its second fund will be SMBs with older founders who are ready to step back, but intact management teams, who will stay on and continue running the companies, with some guidance from PieLAB.

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The focus will remain on the real estate sector, but it is open to making other investments outside the space, so long as the companies have stable recurring revenue.

Mr Rolls’ intends to grow the portfolio to close to a $1 billion market capitalisation, before taking it public.

“By the time we list the portfolio, we think it will be an attractive public market asset, with stable recurring revenue and large cash flow,” he said.

“Typical PE fund models are being questioned because of the artificial deadline to exit businesses with good upside.”

Mr Rolls pointed to Sequoia Capital’s new evergreen fund structure, as one similar to PieLAB’s model, as well as Canadian firm Constellation Software.

He believed investors would gravitate to PieLAB’s offering more than already listed investment company Bailador because it will be establishing a portfolio of profitable businesses.

“They will all pay dividends from day one, and continue to do so,” Mr Rolls said.